Chapter 17 Pricing in Retailing RETAIL MANAGEMENT A

Chapter 17 Pricing in Retailing RETAIL MANAGEMENT: A STRATEGIC APPROACH, 9 th Edition BERMAN EVANS

Chapter Objectives ¯ To describe the role of pricing in a retail strategy and to show that pricing decisions must be made in an integrated and adaptive manner ¯ To examine the impact of consumers; government; manufacturers, wholesalers, and other suppliers; and current and potential competitors on pricing decisions ¯ To present a framework for developing a retail price strategy: objectives, broad policy, basic strategy, implementation, and adjustments 17 -2

Pricing Options for Retailers ¯ Discount orientation ¯ At-the-market orientation ¯ Upscale orientation 17 -3

Figure 17. 1 Ross Dress for Less Means Value 17 -4

Figure 17. 2 Factors Affecting Retail Price Strategy 17 -5

Price Elasticity of Demand ¯ The sensitivity of customers to price changes in terms of the quantities they will buy * Elastic – small percentage changes in price lead to substantial percentage changes in the number of units bought * Inelastic – large percentage changes in price lead to small percentage changes in the number of units bought 17 -6

Table 17. 1 A Movie Theater’s Elasticity of Demand Price ($) 6. 00 Tickets Sold (Saturday Night) 1, 000 Total Ticket Receipts Elasticity of Demand (E) 6, 000 E = 0. 68 7. 00 900 6, 300 E = 0. 79 8. 00 810 6, 480 E = 1. 00 9. 00 720 6, 480 E = 2. 54 10. 00 17 -7 550 5, 500

Price Sensitivity Market Segments ¯ Economic consumers ¯ Status-oriented consumers ¯ Assortment-oriented consumers ¯ Personalizing consumers ¯ Convenience-oriented consumers 17 -8

The Government and Retail Pricing ¯ Horizontal Price Fixing ¯ Vertical Pricing Fixing ¯ Price Discrimination (Robinson-Patman Act) ¯ Minimum Price Laws ¯ Unit Pricing ¯ Item Price Removal ¯ Price Advertising 17 -9

Justifiable Price Discrimination ¯ Products are physically different ¯ The retailers paying different prices are not competitors ¯ Competition is not injured ¯ Price differences are due to differences in supplier costs ¯ Market conditions change – costs rise or fall or competing suppliers shift their prices 17 -10

Competition and Retail Pricing ¯ Market pricing – retailers often price similarly to each other and have less control over price because consumers can easily shop around ¯ Administered pricing – firms seek to attract consumers on the basis of distinctive retailing mixes 17 -11

Figure 17. 3 A Framework for Developing a Retail Price Strategy 17 -12

Objectives and Pricing Market Skimming Market Penetration 17 -13

Figure 17. 4 A Marketing Skimming Approach 17 -14

Figure 17. 5 Specific Pricing Objectives from Which Retailers May Choose 17 -15

Price Policy Choices ¯ No competitors will have lower prices; no competitors will have higher prices; or prices will be consistent with competitors ¯ All items will be priced independently or the prices for all items will be interrelated to maintain image and ensure proper markups ¯ Price leadership will be exerted; competitors will be price leaders and set prices first; or prices will be set independently of competitors ¯ Prices will be constant over a year or season; or prices will change if costs change 17 -16

Price Strategy ¯ Demand-Oriented Pricing ¯ Cost-Oriented Pricing ¯ Competition-Oriented Pricing 17 -17

Demand-Oriented Pricing ¯ Psychological pricing * Price-quality association * Prestige pricing 17 -18

Table 17. 4 Markup Equivalents Percentage of Retail 17 -19 Percentage of Cost 10. 0 11. 1 20. 0 25. 0 30. 0 42. 9 40. 0 66. 7 50. 0 100. 0 60. 0 150. 0 70. 0 233. 3 80. 0 400. 0 900. 0

Figure 17. 6 How to Determine Direct Product Profitability 17 -20

Integration of Approaches to Price Strategy ¯ If prices are reduced, will revenues increase greatly? (Demand orientation) ¯ Should different prices be charged for a product based on negotiations with customers, seasonality, and so on? (Demand orientation) ¯ Will a given price level allow a traditional markup to be attained? (Cost orientation) ¯ What price level is necessary for a product requiring special costs in purchasing, selling, or delivery? (Cost orientation) ¯ What price levels are competitors setting? (Competitive orientation) ¯ Can above-market prices be set due to a superior image? (Competitive orientation) 17 -21

Figure 17. 7 A Checklist of Selected Specific Pricing Decisions 17 -22

Price Strategy Concepts ¯ Customary Pricing * Everyday Low Pricing ¯ Variable Pricing * Yield Management Pricing ¯ One-Price Policy 17 -23 ¯ Flexible Pricing * Contingency Pricing ¯ Odd Pricing ¯ Leader Pricing ¯ Multiple-Unit Pricing ¯ Price Lining

Figure 17. 8 Ikea and Low Pricing 17 -24

Figure 17. 9 Odd Pricing: A Popular Retailing Tactic 17 -25

Reasons to Use Multiple-Unit Pricing ¯ A firm could seek to have shoppers increase their total purchases of an item ¯ This approach can help sell slow-moving and end-of-season merchandise ¯ Price bundling may increase sales of related items 17 -26

Price Adjustments ¯ Adaptive mechanism * Markdown * Additional markup * Employee discount 17 -27

Figure 17. 10 A Price Change Authorization Form 17 -28

Timing Markdowns ¯ Early markdown policy ¯ Late markdown policy ¯ Staggered markdown policy ¯ Automatic markdown plan ¯ Storewide clearance 17 -29

Figure 17. 11 Promoting Markdowns 17 -30